Rodrik Turns Cowen Into Caplan

Rodrik assumes the generic person who is skeptical about free trade considers the lower standards of employment. I would say they usually only focus on the wage. Of course this is just a personal observation, but I would say they’re more against the competition than the conditions. We know when the generic person notices lower standards in the workplace: it’s when a story hits about sweatshops.

The best example is steel importation from Japan. We have seen plagues of people demagog subsidized steel imports from japan “killing” the American steel industry. Here, the generic person isn’t against free trade because of poor working conditions, they’re against the trade because of the “unfairness” of it. It becomes unfair that the Japanese can compete in the steel market because it was subsidized.

The “outsourcing” of jobs rhetoric is spawned because of the realization that an American can’t compete with the wages. Yes, if you delve into more specific people you can see arguments of low wages AND lower standards of working conditions from popular media, but it meant to say “how can we possibly compete with that!?” as opposed to “those poor people!”

Bryan:

1) Let us assume, pace comparative advantage in all its various forms (Ricardian, Hecksher-Ohlin etc), that a rich country like the US will unequivocally gain from freer trade with low-wage countries. In the short-term, Americans will be able to consume beyond the US production possibility curve. In the long-run, which strikes me as more important anyway — and is ignored in virtually all “classical” and “neo-classical” theories of trade — growing openness to competition from abroad in the home market and in third markets will tend to increase specialization here, open us to more competitive pressures to keep prices down, and more pressure to innovate.

2) Granted all that, why is it “irrational” — or in your language, “rationally irrational” — for workers with low- or fairly low-skills in import-competitive industries to oppose such open trade.

The Samuelson-Stolper argument — which I learned at Harvard (quel horreur, n’est-ce-pas?) — has been shown repeatedly, in one econometric study after another that relaxes its original restrictive assumptions, to be valid. Quick here for a recent concise summary in the Encylopedia of WOrld Trade: http://www.ucd.ie/economic/staff/pneary/pdf/stolpers.pdf

3) By extension, why would it then be “rationally irrational” for all low-skilled workers to oppose such openness to trade (and all low-wage immigration from abroad), even those in non-traded sectors of the economy? After all, as low-skilled workers wages decline in the traded sectors, or are simply laid-off (the likely trend in the mid- and long-term), the pool of low-wage workers in the non-traded sectors will increase and reduce the wages there too.

4) Pareto-Improvement. You chastised Milton Friedman recently for opposing a pareto-improvement move. How about applying then the same logic of compensation for Pareto-infringed workers: after all, if (as seems to be the case) Samuelson-Stolper holds true — leave aside factor-equalization possibilities (more controversial in econometric studies and based on more restrictive qualifications) — then the “losers” should be compensated, no?

Exactly what, among other things, Rodrik is arguing for, no?

Or is a Pareto-Improvement or Infringement only what you ascertain in GMU logic?

5) Beyond all that, in an era when more and more trade does not conform just to Ricardian or Hecksher-Ohlin theories (including less restrictive ones than H/O stipulated), what do we really know about long-term trade effects and its spillovers?

Eg, There’s the Linder theory (countries with equal or near-equal aggregate demand curves will trade more and more: e.g, the US and German auto industries); or, to take the latter example, more and more multinational (intra-firm) trade; or the large role of state purchases at home and, depending on the industry, from abroad?

6) We might also regret more and more hostility to openness in trade, but why is that necessarily, given all this, a sign of irrationality or ignorance or xenophobia . . . none of which has ever been established by you or Cowan. Rather, just assumed.

So what is it that Ireland, Holland, and the Scandinavian countries do that makes their populations far less anti-globalizing than ours? Or is it just cultural?

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Michael Gordon, AKA, the buggy professor: http://www.thebuggyprofessor.org

From reading comments on different blogs it seems that the main argument between Dani Rodrik and Tyler Cowen has been lost.

This is Dani Rodrik’s argument:

“Domestic trade takes place within thoroughly embedded markets; there are clear rules and they apply to all transactions equally. International trade, on the other hand, is conducted in only weakly embedded markets: the rules either do not exist or apply unevenly. I believe this is the fundamental reason why their consequences are often perceived so differently.”

This is Tyler Cowen’s argument:

“What’s really happening [the backlash on trade] is that many people, whether in the United States or abroad, are unduly suspicious about economic relations with foreigners. These complaints stem from basic human nature — namely, our tendency to divide people into “in groups” and “out groups” and to elevate one and to demonize the other. Americans fear that foreigners will rise at their expense or “control” some aspects of the economy.

“ONE approach is to appease these sentiments by backing away from trade just a bit, or by managing it, so as to limit the backlash. Giving up momentum, however, isn’t necessarily the right way forward. If we are too apologetic about globalization, we can feed core irrationalities, instead of taming them. The risk is that we will frame trade as a fundamental source of suffering and losses, which would make voters more nervous, not less.”

Dani believes that in matters of international trade workers can understand the concept of procedural fairness. Tyler Cowan believes that the concept of procedural fairness escapes most workers when it comes to their feelings about trade and that they are basically xenophobic.

If Dani is right then the way ahead to appease fears about free trade would be to address matters of procedural fairness. If Tyler is right then, according to him, the way ahead is not to inflame “irrational fears.”

Tyler doesn’t want to slow down the momentum of trade so his rational solution is to dumb down the bad stuff such as questions about procedural fairness and play up the good stuff such as savings at Wal-Mart and expanding markets.

We have been on this route before–NAFTA–where economist decided to hide the bad stuff when arguing for free trade so as not to give ammunition to those who opposed it. Tyler has gone a step further he would deny the rational feeling of those Americans who believe that they are being hurt by free trade and tar them with feelings that he sees as irrational.

I think Dani is right on workers feelings about procedural fairness, but even if he isn’t, I can’t understand Tyler’s approach. To assuage American fears about the benefits of free trade by de-emphasizing their rational feelings while playing up their irrational ones is only rational in it’s Machiavellian logic. In other words, when it comes to facing problems, it’s dishonest. It’s not a good faith approach, and it should be rejected.